Should interest rates remain low when a vaccine is found?

Right after the U.S. drugmaker Pfizer officially stated it had a COVID-19 vaccine breakthrough with a 90% effectiveness rate, the Dow Jones industrial average rose by more than 1,500 points (more than 4%), with Toronto market following the example.

Canadian oil and gas shares were up sharply due to the possibility of people getting back to their favourite road trips and flights. The cost of oil showed a 10% increase.

However, not all segments were affected by this news positively. For instance, companies like Zoom which have benefitted from the restrictions were shocked by it.

And there’s one more group for whom good news is often not so good. We’re talking about borrowers.

As a rule, bad news may be good for interest rates, while good news has an absolutely different influence.

Central bankers all over the world, including the BoC’s governor Tiff Macklem, have reduced rates to the so-called effective lower level (as close to zero as possible) in order to support the economy amid the COVID-19 crisis and lockdown.

“Monetary policy can’t provide a vaccine,” – Macklem noted. “Nevertheless, it can support the economy during the pandemic and, when we get a vaccine, make sure the economy returns to its full potential.”

But what if the pandemic ends faster than we expect? According to Macklem, the optimistic scenarios suggests a vaccine distribution in 2021. But the most likely scenario expects it in 2022, with an economic recovery not sooner than in 2023.

The U.S. Federal Reserve chair Jerome Powell also predicted a long recovery, noting the rates will remain low even when inflation exceeds the bank’s 2% target and jobs start to rebound.

“It’s not that we’re only not thinking about increasing rates,” – Powell said in June. “We’re not even thinking about thinking about increasing rates.”

However, although central bankers may not be considering a rate hike, the sudden optimism about the pandemic ending in the nearest future should make borrowers at least think about a possible rate increase.